The Iranian Rial’s Economic Death Spiral

Posted about 3 months ago|Comments Off on The Iranian Rial’s Economic Death Spiral

By Steve Hanke.

The Grim Reaper has taken his scythe to the Iranian rial (see chart below). The Islamic Republic of Iran remains in the ever-tightening grip of an economic death spiral. The economy is ever-vulnerable because of problems created by the last Shah, and added to massively by the theocratic regime. Indeed, the economy is more vulnerable to both internal and external shocks than ever. That vulnerability will become more apparent in the face of President Trump’s tearing up of the Joint Comprehensive Plan of Action (JCPOA), and the laying on of more primary and secondary sanctions against Iran. How fast the death spiral will spin is anyone’s guess.

The most important price in an economy is the exchange rate between the local currency and the world’s reserve currency — the U.S. dollar. In Iran, the IRR/USD exchange rate, represents the most important price. By using active and available black-market (read: free market) data for the Iranian rial, I have transformed the black-market exchange rate into accurate measurements of country wide inflation. The economic principle ofPurchasing Power Parity (PPP) allows for this reliable transformation, so long as the annual inflation rate exceeds 25%.

The chart below shows how Iran’s implied annual inflation rate has surged to an annual rate of 75.8% with the collapse of the rial’s value against the U.S. dollar. Indeed inflation has spiked in 2018.

So, what is to come of Iran’s economic death spiral? It can be summed up in one word: misery.

To get a sense of how miserable Iran is, we can look to Hanke’s Annual Misery Index. Back in February when the index was calculated, Iran ranked the 11th most miserable country, out of the 98 countries in the index. Using today’s surging inflation rate of 75.8% in our calculation of misery, Iran would a rank 3rd, just behind Venezuela and Syria.

Without meaningful reform in Iran, more of the same will be expected for its economy and the rial. In the words of George W. Bush, “this sucker could go down.”

Steve Hanke

Steve H. Hanke is a Professor of Applied Economics at The Johns Hopkins University in Baltimore and a Senior Fellow at the Cato Institute in Washington, D.C.